Internal Revenue Service plans to automate tax payments are intended to save money by reducing the amount of paper the agency must handle. But there may also be an unwelcome effect for banks: eliminating their ability to earn money on float.

As a result, many banks may offer their own automated services so they can maintain some use of the customer's funds.

Others, such as Bank of America Corp., offer customers an automated system in which payments are transferred from customer accounts when they specify and are held in a bank account till the payment is due. In this approach, the bank has the use of the customer's funds for several days.

"Float is a concern [for participants of Adept], not so much in the beginning of the project, because volumes are so small, but as it moves forward," said Kathleen S. Higginbottom, vice president at Durfee Attleboro Bank.

"The new systems banks are franchising are powerful competition to Adept," said Jim Rankin, senior program manager for the Adept project.

The IRS is preparing to evaluate Adept and is soliciting bank proposals for automating tax payments by using cash concentration, which would allow institutions some float.

The tests with banks are part of a massive overhaul of the tax administration system that the IRS unveiled early this month. The $8 billion plan, scheduled for completion by the year 2000, is designed to move the IRS from a fragmented, paper-based system to an integrated electronic system.

The IRS has been testing Adept since June 1990. For most of the year, the banks - working with some 22 corporations - sent about $24.7 million in withholding tax payments, and $406,000 in personal income tax as credits over the automated clearing-house system.

Paper-Intensive Payments

While the Adept system would be suitable for any type of tax payment over the automated clearing system, the IRS focused on withholding tax payments also called federal tax deposits, because these types of payments are extremely paper-intensive.

Corporations file to their bank endless numbers of federal tax-deposit coupons on a daily, weekly or monthly basis, depending on the volume of coupons. In turn, banks process these coupons, then send detailed payments reports to the IRS and somewhat less-detailed ones to the Federal Reserve. To date, few banks have automated this process.

These tax deposits represent 80 million transactions per year, and $800 billion worth of annual payments, with over 14,000 financial institutions processing the payments.

While the initial test phase is over, all six banks can continue to use the Adept interface to transmit tax payments, until the IRS comes up with a better solution, according to IRS officials.

Banks are not paid by the IRS for processing federal tax deposits.

Customers Threaten to Leave

"Float is a major issue," Mr. Rankin said. "If you eliminate float on the accounts, the banks go into the hole. If we do eliminate float, we will have to address this issue: Are we expecting them to do this for nothing?"

At the same time, some big customers may demand a system like Adept to use their processing burden. However, Mr. Rankin said that some large corporate customers are demanding a rebate from their banks on the interest banks making from float.

"We've had customers say we want to do Adept, and if their bank won't do it, they'll move their account." said Mr. Rankin.

Mr. Rankin said the IRS had considered paying banks on a per-transaction basis for electronic processing, but "we haven't run enough volume to see how cost-effective that would be."

In March, the Financial Management Service division of the Department of the Treasury requested proposals from financial institutions on how the agency could use cash concentration to modernize the withholding tax process, according to Cynthia L. Johnson, project manager for the cash management unit of the division.